Three essays in corporate finance

Abstract

This dissertation is comprised of three chapters in empirical corporate finance, which are related through the topics of debt financing and credit derivatives. The first dissertation chapter examines debt specialization and credit default swaps, the second chapter researches credit default swaps and bank loan renegotiation, and the third chapter analyzes aggregate credit supply and debt structure.

All three chapters contribute to our understanding of corporate finance – specifically, debt financing and composition as well as bank loans. To the best of my knowledge, this dissertation is the first to examine how credit default swaps affect debt specialization or bank loan renegotiation or how aggregate credit supply influences debt structure.

In the third chapter, I research how fluctuations in aggregate credit supply impact debt structure. I use six proxy variables for credit supply in order to gauge how debt structure changes under different lending conditions. My results show that periods of expansionary credit are associated with debt concentration, a decrease in the number of bank loan lenders, an increase in the probability of repeat lenders, and an increase in the probability of repeat lead arrangers for firms. However, I argue that this phenomenon is dependent on the riskiness of the firm. Better quality firms choose to concentrate debt structure when supply is abundant whereas low quality firms may have little or no choice. I hypothesize that firms concentrate debt structure as a way to enhance negotiating leverage over creditors and increase the value of their strategic default option.

The second chapter investigates whether CDSs affect the renegotiation of bank loans. Using Michael Roberts’s hand-collected dataset on bank loan events, I offer evidence that the inception of CDS trading on a firm’s debt is associated with both a decreased number and lower probability of amendments, restatements, and rollovers to existing lenders of bank loans, which is persistent over time and more pronounced when CDSs begin trading prior to bank loan origination. Additionally, I find that following the beginning of CDS trading firms are more likely to end bank loans on the stated maturity date (as opposed to premature termination or refinancing with different lenders), engage in shorter renegotiations in terms of monthly duration, and face cheaper borrowing costs. I argue that the empty creditor problem which decreases the negotiating power of borrowers is the primary reason for this behavior.

In the first chapter, I ask how credit default swaps (CDSs) affect debt structure. I provide evidence that the inception of CDS trading on a firm’s debt is associated with higher debt specialization. I argue that CDS firms concentrate debt types as a way to mitigate creditor conflicts and costs in bankruptcy, which is made more likely because of the empty creditor problem. My results are robust to different model specifications and sub-samples. I also extend the analysis to include bank loan data where I examine how CDS trading impacts the concentration of debt ownership (increases), number of bank loan lenders (decreases), lead arranger share of loan issuance (increases), probability of repeat lenders (increases), and probability of repeat lead arrangers (increases). Finally, I implement propensity score matching to control for differing firm characteristics between CDS and non-CDS firms and instrumental variables to control for endogeneity between debt concentration and CDS trading.